Extending your cash runway

A cash runway is a measure of how long a business can continue with the cash it has available to cover necessary expenses, pay off debt, and leverage for growth. It's incredibly useful to know how long you have until the business (literally) will cease. Five weeks, five months or five years. If your business is always generating a cash surplus each month, you'll never run out of cash of course, so the cash runway is infinite. 
 

A cash runway can be planned, often in the case of new start-ups, who raise capital and then commence scaling the business knowing they will initially make a loss, covered by their cash war chest. Their cash runway measures when they (should) break even and make a profit. 
 

Alternatively, a business may be suffering losses month to month. Their cash runway is how long they have left until the accumulated negative profit consumes the cash reserves.

How to calculate your cash runway
 

A cash runway is determined by dividing your cash balance by your burn rate. The easiest way to calculate is to use the last 12 months' cashflow to estimate likely sales, expenses and loss each month, for the next 12 months. Average the monthly losses, and divide that into your overall cash balance.
 

This will reveal the number of months you have before your cash zero date. 

Once you know how long you have to make changes, prioritise actions to extend your cash runway.

Step 1. Re-balance the business

Since the point of being in business is to drive a profit, you'll need to adjust what you're doing to get back on track. It may involve changing various aspects of the company.
 

Collaborate

Form partnerships, joint ventures, or alliances to access new resources or customers. By leveraging the strengths of other businesses, you can increase your competitive advantage.
 

New business models

This can involve transitioning to a subscription-based model or using an online marketplace. By changing how you generate revenue, you'll be able to adapt to changes in the market and increase profitability.

Step 2. Extend the runway

Now that you've made adjustments to earn more income, the next step is to extend your cash reserve.

Generate customer cash 

Issue any invoices in advance if you can, especially for larger amounts. Offer early payment incentives. If you don't already, request progress payments or up-front deposits to bring forward future cash payments.
 

Credit control

Keep credit under control by sending out invoices immediately, with correct details and easy payment options. Your invoicing software can send automatic payment reminders and alert you to any outstanding debts. 
 

Reinvest in yourself

You may need to put some of your own money back into the business. If you know the business is having a short-term crisis, you'd consider funding the cash crisis yourself. Funds could come from savings, selling assets or lending against your home.
 

Grants and subsidies

See what government support is available with the Funding Explorer tool on the Business.govt.nz website.
 

Borrow

Explore financing options like lines of credit or loans to help you manage your cashflow. Explore how ASB has support for every stage of your business.
Inject capital

You may need to consider equity funding from crowdfunding or attracting an angel investor. 
 

Reduce cash burn

Look at all aspects of your business to identify ways to reduce your cash burn. Cancel or downgrade subscriptions, sell assets or stock, and negotiate monthly payments, such as your lease and internet bill. 
 

Delay payments

If you are in danger of being unable to make ends meet, be proactive and negotiate any due payments for later. Paying late is better than not paying at all. Ask your suppliers (even Inland Revenue if you are desperate) if you can delay payments due or set up a payment plan. Or use a credit card to push smaller payments further out if you know cashflow is coming.

Step 3. If all else fails   

Facing your cash zero date can be a difficult and emotional experience, especially if you must stop trading. If you feel that your business is in a perilous state, there are a few other options. 

Seek help

No-one expects you to have all the answers. There are numerous agencies and people to talk to, from business experts to mental health support. Contact your local Regional Business Partner first, to guide you in the right direction. 
 

Delete poor-performing parts of the business

Though it's often a difficult decision, it might be necessary to ensure success. Be thoughtful and strategic in your approach to minimise the impact on employees, customers, and other stakeholders.
 

Cancel anything not contributing immediately to cashflow

Free up resources so you can focus on core operations and restore profitability. This might include non-essential products or services, inefficient processes, or activities such as conferences or staff parties.
 

Exit low-margin markets 

If you're involved in a market that isn't pulling its weight, let it go. Once you've analysed your income streams, it will be clear which markets are your heavy hitters and which are dragging you down.
 

Reduce your main overhead

Unfortunately, you may need to lower your head count as it probably your largest overhead. It often happens, the key is to be honest with your employees, communicate with them as soon as possible and offer support. 

Summary

Extending your cash runway gives you time to make changes if your business isn't earning more than it costs to run. Often these changes should have been part of business-as-usual (BAU) processes. Once you're aware of where you're going wrong, you can take steps to correct course and remain profitable each month.

Next Steps

• Calculate your burn rate and the length of your cash runway.
• If you find that you're cash negative, re-balance your business by generating new external sources of income.
• Reduce your monthly costs to decrease your burn rate further.
• Extend your cash runway by increasing revenue, applying for extra funding, managing inventory, and selling assets.